The Difference Between Large Funds and Small Funds

I have always been a “small fund” oriented investor. Both models work if executed well, but they are different.

With small funds, you only need to find a few good ideas a year to get behind. That is true in hedge funds, private equity, venture capital, and probably many other asset classes.

With large funds, you need to get behind every good idea every year.

There are some investors out there than can execute the large fund model. I imagine you can list them and so can I. But there aren’t many who can.

There are many investors out there that can execute the small fund model. You can do it with a geographic focus. You can do it with a sector focus. You just need to know a few things really well and then select the best among what you know and ignore everything else.

That is essentially what we do at USV. Because we only manage funds in the $150mm to $200mm range, we only need to invest in 6-10 new companies a year and we only need a third of them to work. So that means 2-3 good investments a year and we are doing well. Given how much opportunity is out there, 2-3 good ones a year is doable. Even if we miss on lots of great opportunities.

I don’t lose a lot of sleep over missing good deals. We can afford to do that.

But imagine if you had a $1bn fund to invest. Then you’d need 10-20 good investments a year. If good investments are defined as billion dollar exits or better, then that would require getting a meaningful percentage of them. Maybe you would need to get 33% to 50% of all good deals every year. I couldn’t sleep if I had to do that. Because I know I couldn’t do that sustainably. Very few can.